Telstra's naive TV vision

Telstra's declaration that over-the-top web-based TV services are not a threat to its media interests is startling in the face of the catastrophic experiences of the music and publishing industries.

The company’s flawed analysis of the effects of OTT

Telstra recently stated that it does not see over-the-top IPTV services as a serious threat to the broader media industry. Taking such an approach is, in our view, extremely arrogant and dangerous. It sounds like the ‘Google schmoogle’ statement of the company’s previous chief executive, Sol Trujillo. Looking at what these OTT services have done to other industries, such as music and publishing, I would have expected at least a more cautious approach.

In reality, what these services tend to do is cannibalise and undermine the traditional media. So the traditional media might indeed survive alongside them, but eventually the basis of such a service – whether advertising revenues or customer subscriptions – will be undermined once the business models underpinning those traditional services become unstuck. It will lead to fragmentation and in the end, yes, the old media will survive, but much more in a niche market format and based on totally different business models. At the same time the OTT models will have attracted far larger viewer and audience shares, notwithstanding the fact that they will operate at a much smaller revenue per user.

While Telstra belittled companies such as Netflix because of its low revenues the reality is that, penetration-wise, OTT video services such as, for example, YouTube will have close to 100 per cent penetration already among broadband users. Of course, they don’t generate revenue from content in the same way that pay TV operators do, but they are replacing significant sections of the traditional broadcasting services’ viewer and audience shares.

The company’s flawed analysis of the Foxtel situation

Based on what I see as a flawed assumption by the company about IPTV it is therefore, in our view, also wrong to repeat the company’s message that Foxtel will not be in competition with Telstra’s IPTV services. By simply stating this it first of all reinforces the silo approach that still exists under the Telstra Media umbrella. Telstra Media talks up the sheer length and breadth of the Foxtel offering, and that this will allow the company to charge $120 per month. I find such a statement beyond comprehension.

The ‘length and breadth’ statement is a ‘forced upon’ approach and not based on customer choice; and furthermore it is mainly aimed at the 20 per cent of the population that can be classified as committed sports fans who – however disgruntled they might be – are prepared to take that length and breadth as the only way for them to watch the sports they want. On top of that there is another dwindling 10 per cent of mainly older customers who have enough money not to be bothered too much by the $120 per month. Telstra Media shows great ignorance in making the statements they did in relation to Foxtel.

They also talk about a growth of the service to a 50 per cent penetration of Foxtel – this at a time when penetration is moving southward below the 30 per cent mark. Back in 1996 I questioned the company’s prediction of 75 per cent pay TV penetration by 2000, plus another prediction made around 2006 of 40 per cent penetration within three or four years from that time.

In what way is the market different to make the company think it is making a correct prediction this time? Our estimate is that Foxtel’s market share – based on its current pay TV business model – will drop to 25 per cent, and could even drop to 20 per cent.

Pay TV services are declining around the world and the key reason the decline is relatively slow in several countries is that over the last decade cable TV companies have very successfully bundled broadband access and VoIP with their pay TV offerings. Foxtel does not have this buffer to protect it from a more rapid decline.

Under the current circumstances the best thing Foxtel can hope for is to remain a successful niche market product; but to maintain its current market penetration of around 28 per cent it will increasingly have to lower its prices.

Of course, Foxtel can also move into new services, such as apps on smart TVs, but the problem is that the current business model and its owner structure is not well-suited to models that are required to run such services in a profitable way. For example, success in smart TV could easily lead to a more rapid decline in traditional pay TV.

Furthermore, any aggressive move into this IPTV market could bring it into conflict with the contract it has with Telstra.

Conclusions

What I have been saying for close to a decade is that the company needs to tear down its silos and start treating its digital media business in a holistic way. That will require cannibalisation between the silos, but once a proper digital media company has been set up it can start looking at new business opportunities. New growth will have to come from totally new revenue streams. These new revenue streams will not come from the individual silos – they can only come from a totally transformed and focused digital media company, and so far there is no indication that Telstra has embarked on this path. I would argue that it is already too late for this, but waiting any longer will mean fewer and fewer potential opportunities.

The way the company seems to continue to operate its media businesses allows it to milk the lucrative and profitable proprietary silos for as long as possible, accepting a further decline and with strategies in place to slow down that decline as long as possible. This for the short term will allow them to maintain relatively high profits, but obviously over time it will lead to a complete decline of these businesses.

There is not necessarily anything wrong with this strategy but it is contrary to the rhetoric of the company, which claims it is on track to develop a new digital media business.

Paul Budde is the managing director of BuddeComm, an independent telecommunications research and consultancy company, which includes 45 national and international researchers in 15 countries.

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